2021 Midyear Outlook: Navigating through the recovery
Listen in as we discuss our outlook on the US recovery and the Federal Reserve’s new framework, including its impact on inflation, interest rates and growth.
Recently, we highlighted our thoughts on the US consumer’s impact on the domestic economic recovery as well as our view on inflation in relation to Consumer Price Index.
We believe the Federal Reserve (Fed) will begin tapering its asset purchase program, currently at $120 billion per month, in January 2022 and complete tapering by the end of year. We expect the first interest rate hike of the cycle to occur in the second quarter of 2023. We think the risk to this forecast is for the Fed to act sooner, and think the market is currently underestimating how much the Fed will have to hike interest rates, once the rate hike cycle starts.
If the Fed is successful in generating inflation, we think this could bring about higher nominal gross domestic product (GDP) growth than the US economy experienced in the last cycle. This has potential implications for market interest rates and risk assets.
The steepness of the yield curve for US Treasury bonds (as measured by the difference between the yield on the 10-year bond and 2-year bond) usually peaks before the first Fed interest rate hike of a cycle as the market anticipates the Fed’s actions by pushing up yields at the short-end of the curve. While some may view this as a bearish signal, this typically happens early in the economic cycle. We would not become concerned about the slope of the yield curve unless it turns negative.
Chart source: Macrobond. Dates shown are January 1, 1990 to July 1, 2021.
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